"April is the cruelest month," wrote T.S. Eliot, but for Anne
Lundstrom, president of All Flex Inc. in Northfield, Minn., the most brutal
time of year is late February, sometimes stretching into March. That's
when she and her 40 employees sit at their desks, pull out their pens
and start to fill out stacks of health insurance applications. They've
done it every winter now for four years. "The whole process gets
to be quite tedious for people. And for my human resource peoplewell,
it's very painful," said Lundstrom. "But you have to do it if
you want to get better rates."
All Flex, a manufacturer of flexible printed circuits,
pays every penny of its employees' health insurance premiums"to
be competitive in the industry, we have to," said Lundstromand
rate increases have a strong impact on the company's bottom line.
Premiums rose 12 percent in 1999 and another 12 percent in 2000.
Last year, premiums were set to rise 40 percent, so everyone filled
out another set of applications, the company sent them out for bids,
and they tracked down a new insurer who quoted a lower price for
2001, "just" 20 percent higher than 2000 premiums.
In 2002, same deal: new set of applications, new round
of bids and a new search for an affordable health plan. "Somebody
will have a slightly lower rate, and we'll switch to them,"
Lundstrom predicted. "But it's very disruptive to the employees
every single year to have to go through this long drawn-out process."
Lundstrom says it's kind of surprising that they always find one
insurer with a significantly lower rate, since they provide the
same information to all companies. "I think it's because they
want to get the business. They're out for more market share, I imagine."
But if experience is any guide, she said, this year's low bidder
will be next year's unaffordable health plan.
As a small employer with limited leverage, All Flex
probably faces bigger premium hikes than the average corporation,
but the trend it faces is the norm, not the exception. And while
insurance companies inevitably jockey for market sharewith
industry premiums cycling down to gain customers and then up to
recoup coststhe general trend of climbing premiums reflects
a universal rise in the underlying cost of providing health care.
Throughout the country, health care expenditure is
climbing at a rate far exceeding that of inflation, placing a strain
on company payrolls, government budgets and individual wallets.
The last time health care costs were climbing like this was in the
early 1990s and the Clinton administration responded with an ill-fated
attempt at health care reform. Health care expenditure stabilized
for a time in the mid-1990sas managed care ushered in a short-lived
phase of cost-controlbut expenditure is now rising again as
both providers and patients have rebelled against the diminished
choices that managed care companies tried to impose.
As a nation, we spent $1.3 trillion on health care
in 2000, 6.9 percent more than the year before. The figure represents
13.2 percent of gross domestic product (GDP), approaching twice
the 7 percent share spent in 1970 and higher than any other industrialized
nation. By 2010, it's projected the nation will devote 16 percent
of GDP to health care and, says the 2002 Economic Report of the
President, the figure could eventually reach 38 percent of GDP
"under conservative assumptions."
Why are costs climbing and what can be done?
To some degree, the problem and potential solutions can be analyzed
through the tools of elementary supply and demand, the traditional
means of understanding markets for any product, be it shoes, wheat
or angioplasties. The factors that influence demand for health care
and its supply have had a strong impact on recent price trends and
some of those factors are amenable to policy intervention.
Demand: technology and aging
Two key factors are behind the surge in demand for
health care: technological change and aging of the population. These
aren't the only factors, of course, but they're among the most significant.
The last two decades have seen a massive increase
in new medical technologyfrom arterial stents and cardiac
defibrillators to diagnostic tools like computed tomography and
genetic screeningand each of those technologies created a
major new market and a tremendous surge in spending. Even getting
something as "basic" as a knee replacement costs about
$20,000 in hospital fees alone, and the number of such knee operations
has increased sixfold over the last 20 years. And with each passing
month, the Food and Drug Administration (FDA) approves a new technology
to address an old ailment.
In January 2002, for example, Kay Wisneski of Green
Bay became the first person in Wisconsin to swallow a capsule containing
a tiny wireless video camera. "At the end of the day,"
she reported, "there were over 58,000 pictures of my insides."
Not a pretty sight, maybe, but for Wisneski it was a blessing. For
over three decades, she's suffered from a painful inflammatory bowel
illness called Crohn's disease and though the camera-in-a-capsule
can't cure the inflammation, it makes diagnosis and treatment more
accurate and less painful.
But the financial pill is hard to swallow: The single-use
capsule costs $450, not counting the doctor's time and the high-tech
machines needed to receive, process and display the images of Wisneski's
inner being. Future versions of the capsule might include a built-in
motor, and tiny blades or lasers for microsurgery. Fantastic stuff,
but it won't come cheap.
A subset of the new technologyone that draws
both positive and negative attentionis pharmaceuticals. Recent
attention has focused on prices. For example, in late February,
Montana's attorney general sued 18 drug firms, accusing them of
illegally inflating prices.
But perhaps more important is the issue of quantity.
According to most studies of rising drug expenditure, higher prices
account for less of the jump in total cost than do greater quantities
purchased. Last year alone, the number of prescriptions grew 6.6
percent, to 3.3 billion.
And why are we popping more pills? In part, because
new drugs like Viagra address previously untreatable problems. But
a major pump behind rising demand is marketing by pharmaceutical
companies. Drug company spending on direct-to-consumer advertising
has soared from $859 million in 1997, when the FDA loosened ad restrictions,
to nearly $2.5 billion in 2001. Critics have called this advertising
excessive, saying that pharmaceutical firms spend more on advertising
than on research and development. The advertising is definitely
effective in raising brand awareness; whether that's good or bad
may depend on one's perspective.
Fifty-two percent of physicians surveyed by the Minnesota
Medical Association in summer 2000 said they had felt pressured
by patients to write prescriptions for advertised drugs even though
they felt the drugs were unnecessary. Sixty percent said encounter
time with patients is increasing because of direct-to-consumer advertising.
On the positive side, physicians noted that patients seem more aware
of risk factors and that advertising leads patients to contact their
The second fundamental factor in health care demand
is age. The number of Americans aged 65 or older went up 11 percent
from 1990 to 2000. By 2020, according to the U.S. Census Bureau,
the percentage of the population 65 and older will rise from 12.6
percent to 16.5 percent. Several Ninth District states are ahead
of that aging curve. In Michigan and North Dakota, the proportion
of the population 65 and older grew 40 percent from 1990 to 2000;
Montana saw 10 percent growth but will see far more in the future.
Current projections are that the number of Montanans aged 65 and
older will grow from 133,000 in 2005 to 209,000 in 2020, over 57
Since the older use far more health care than the
young, the implications for health care demand are enormous. The
medical spending of 55- to
64-year-olds is almost twice that of 35- to 44-year-olds. And those
aged 65 years and older, though they comprise just one of eight
Americans, account for over a third of total health spending. As
the population of district states ages, the demand for medical services
will inevitably climb.
... and supply: too little labor, too much waste
In the face of climbing demand for health care is
a supply curve with its own set of problems. One of the more significant
is a labor shortage. Another is medical fraud. Waste and malpractice
insurance are still other factors that influence the supply curve.
Together, these factors increase the cost of doing business and
those costs tend to get passed along to customers.
Health care systems in the Ninth District suffer significant
labor shortages. Nurses, in particular, are in high demand. Shortages
of dentists, pharmacists, radiologists and a number of other medical
subspecialties are also widespread, and district hospitals have
been scrambling to find workers. [See also "Rural
Jim Aherns, president of the Montana Hospital Association,
said personnel shortages "affect almost all of the health care
professions" in Montana and many neighboring states, and they're
particularly serious for nurses, pharmacists and lab technicians.
The solution, he said, includes better educational programs and
higher wages. As if to underline the latter point, Great Falls'
Benefis Hospital, the state's largest, raised its rates 8 percent
this year, saying that the hospital has had to give nurses and radiology
technicians raises to keep them from leaving.
In South Dakota, the 2002 Legislature funded a tuition
reimbursement program for nursing education to address what state
officials view as a severe shortage, but advocates acknowledge the
billwhich offers up to 60 nurses no more than $5,000 eachis
a small, longer-term effort. Shortages of nurses in Minnesota gave
the Minnesota Nurses Association (MNA) significant leverage in its
salary negotiations in 2001, and the negotiated pay hikes have had
a "ripple effect" at hospitals elsewhere, according to
the MNA Web site.
The ripples are being felt in the upper reaches of health care as
well. Signing bonuses for cardiovascular surgeons are as high as
$500,000 in Sioux Falls, with $1 million salary guarantees for two
years, according to Michael Myers, a professor of health services
administration at the University of South Dakota. As South Dakota
competed in the national market for specialists, average salary
offers to radiologists jumped from $225,000 in 1999 to $271,000
The rising price of malpractice insurance is one factor
that drives physicians from the trade, dissuades those who consider
entering it and raises the costs of those who stay in business.
Jury awards in malpractice suits have climbed in recent years, forcing
insurers to raise premiums. The average increase was 10 percent
last year for internists and general surgeons, but some parts of
the country saw 86 percent jumps. Even with the premium hikes, Minnesota's
St. Paul Cos., the nation's second-largest malpractice insurer,
decided in December 2001 to phase out of the business entirely.
Diagnosing for dollars
Supply curves for medical care are significantly affected
by fraud. According to a widely quoted 1992 General Accounting Office
report, health care fraud and abuse account for about $100 billion
a year, nearly 10 percent of total health care expenditure. Other
fraud investigators peg the figure closer to $250 billion, but the
fact is no one really knows the total.
Some analysts predict that physician shortages will
grow worse; Richard Cooper at the Health Policy Institute of the
Medical College of Wisconsin estimates that the United States will
have a shortage of 50,000 physicians by 2010. The number of applicants
to medical schools has dropped 26 percent since 1996, and the number
of applicants to residency programs in general surgery has dropped
30 percent over the last nine years.
Fraud can include kickbacks, "upcoding" (billing by providers
for a more expensive service than was actually provided), charging
for services not ordered and "unbundling" (charging insurers
for many individual tests rather than for an agreed-upon "bundled"
discount). During the 1990s, the FBI devoted more agents to fraud,
and the number of active health care fraud investigations grew from
592 in 1992 to over 3,000 in 1999. Convictions rose from 116 to
548 in that period.
Spurred by a federal inquiry into alleged overcharges
to Medicaid by Allina, one of Minnesota's largest integrated health
networks, the state's attorney general launched his own investigation,
and in March 2001 he filed suit against Allina, alleging that 47
percent of the company's insurance premiums went toward administrative
expenses, including millions spent on perks like golf outings and
Allina disputed the charges, but eventually agreed
to major changes, including a split-up of its insurance and provider
operations and replacing its board of directors and top management.
Separately, Allina spent nearly $20 million to dispose of US Justice
Department claims of overcharging.
Another factor behind climbing costs is waste associated
with medical practices that are unwise or unnecessary. Unfortunately,
doctors are often unaware of the best treatments, let alone the
most cost-effective. "There's enormous disagreement among the
care providers themselves," noted Kay Unger, professor of health
economics at the University of Montana at Missoula. Even well-informed
doctors presented with a given diagnosis will show "a wide
variation in what the appropriate treatment is." And when experts
do reach consensus on a best practice, it often takes years for
the entire profession to adopt it. For example, beta blockers were
shown over a decade ago to significantly increase survival rates
after a heart attacks. But in 2000, nearly half of heart attack
victims still didn't receive them.
The wide variations in medical expenditure among different
US geographic regions demonstrate that significant sums are wasted
on unneeded health care. Per capita Medicare spending in Miami in
1996 was nearly two and a half times that in Minneapolis, according
to a recent study, even when differences in age, sex and race were
taken into account. Pricing levels couldn't explain the variation,
nor could disease differentials.
According to the study's authors, Miami doctors and
patients simply chose more treatments and more expensive treatments
than did those in Minneapolis, and the additional spending had no
discernible impact on health outcomes. Bringing treatment down to
the level of the low-cost regions of the country would save $40
billion, concluded the researchers.
Without unanimity aboutand adoption ofbest
medical practices there is significant economic waste. But bringing
that about is a major challenge, demanding better information systems,
improved medical education and incentives to encourage efficient
Faced with this litany of problems, policymakers in
Ninth District states are looking for answers. Montana's governor
has appointed a labor shortage task force to research the problem
and develop recommendations for the 2003 Legislature; a similar
task force is looking into insurance coverage troubles. Michigan's
governor sought greater state control over the nonprofit Blue Cross
Blue Shield after a recent audit found that the state's largest
health insurer was in precarious financial shape. The state is also
negotiating price discounts from pharmaceutical firms.
Minnesota, like Montana, has a health policy task
force considering problems and options in advance of next year's
legislative session. South Dakota has tried to encourage health
workforce growth by increasing funds for nursing education and limiting
doctor liability. In Wisconsin, legislators have considered limiting
hospital rate increases and prohibiting new hospital construction.
All of these task forces and initiatives will have
to cope not only with the basic issues of supply and demand discussed
above, but with a host of more vexing complications, that discourage
even seasoned health policy experts. [See "Beyond
supply and demand".] "History suggests that it may
be folly to expect that there are any easy or magic answers to this
problem," wrote health care analysts Drew Altman and Larry
Levitt in a January 2002 commentary. After reviewing the inability
of private and government efforts over the past 40 years to permanently
curb growth in health care spending, they concluded that "the
apparent failure of all approaches reflects the American people's
uncontainable desire for the latest and best health care, and [suggests]
that what we will do in the future is try small things that will
work at the margin, complain a lot, but ultimately pay the bill."